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Best Energy Sector Mutual Funds

Energy Sector Mutual Funds invest in companies operating in the energy and resources sector. these are open ended equity schemes suitable for long term investment options & highly volatile in the short term.

Best Energy Sector Mutual Funds to Invest in 2022

Fund NameScripbox Opinion
Till Date CAGR
Tata Resources & Energy Fund (G)
Tata Resources & Energy Fund (G)

25.3%

16.7%

21.3%

12.6%

What are Energy Sector Mutual Funds in India?

Energy mutual funds are thematic mutual funds that invest across companies operating in the energy sector.

The materials space’s growth potential is related to the country’s economic growth. In comparison to other emerging markets, India’s per capita consumption in the materials and oil and gas (energy) sector is low. Housing, urbanisation, and infrastructure investment are long-term demand drivers for commodities. Owing to the increasing demand and the growth drivers, the growth prospects of the energy sector look bright.
Thematic energy funds build a portfolio by investing in firms whose economic operations centre around natural resource production, development, discovery, distribution, energy, mining, and so on.
The energy mutual funds invest at least 80% of their net assets in equity/equity-related instruments of companies in the energy and resources sectors in India.
These funds try to maintain a good balance between non-cyclical businesses and cyclical businesses. Non-cyclical businesses are the ones that are not affected during market turmoil. On the other hand, cyclical businesses are the ones that can outperform when certain themes take off. Chemicals and agricultural products such as fertilisers and pesticides are examples of non-cyclical businesses. Iron, steel, and cement are cyclical businesses.
The energy sector mutual funds are open-ended equity schemes and therefore are suitable long term investment options. Thus, these funds can be highly volatile in the short term. Moreover, only those investors who have an in-depth understanding of the energy sector and can track it closely should consider investing in energy funds. Since these are high-risk funds, a long-term investment horizon is necessary.

Advantages of Investing in Energy Sector Mutual Funds

Following are the advantages of investing in energy mutual funds:

  • Good Potential: India is undergoing major reforms. The energy sector offers a good potential to generate significant returns in the long term. With India and the world moving towards renewable energy and sustainable alternatives, the sector has good potential for growth. Since the energy theme is highly diversified, the fund can leverage each sector and invest in high potential companies.
  • Long Term Capital Appreciation: Energy funds identify long-term growth potential companies. Energy funds invest in companies with strong financials. Since these are pure equity schemes, a long term investment horizon is necessary to enjoy significant returns.
  • Diversification: Energy mutual funds invest in companies that deal in natural resource discovery, development, production, or distribution, such as energy, mining, etc. Furthermore, they also invest in alternative energy and energy technology sectors, with a focus on renewable energy, automotive and on-site power generation, energy storage, and supporting energy technologies. Therefore, you can achieve good diversification with these funds.
  • Professional Management: If you are interested in investing in the energy sector, it can often be difficult to identify stocks and invest in them. Energy sector mutual funds are a good alternative. Since the fund manager focuses on selecting energy stocks, you can leverage their expertise and invest in the fund.

Who Should Invest in Energy Mutual Funds?

Consider investing in energy funds if you wish to seek exposure to the energy and its sub-sectors sector. Energy mutual funds are suitable for investors looking for tactical allocation. These funds offer good diversification to your investment portfolio. If you wish to invest across renewable energy, power, oil and gas, metals, etc., energy sector funds seem to be a good fit.
Energy mutual funds are equity schemes. Therefore, a long-term investment horizon is necessary to overcome market volatility. Energy thematic funds follow a particular theme and, hence, are highly volatile in the short term. Though the funds invest in high-quality stocks, the markets are volatile. And the portfolio will be highly sensitive to the movements. Thus, invest only if you are comfortable with the risk levels. Furthermore, since energy funds focus on one single theme, exposure of more than 10% to your portfolio is not advisable.

How to Select Energy Mutual Funds for Investment?

The energy sector is in focus, and the opportunities are bright; however, you should be careful while choosing a scheme to invest in. Following are some parameters that will help you select the best energy mutual fund for investment:

Energy Sector Outlook

The Indian power sector is undergoing a tremendous transformation redefining the industry’s outlook. Sustained economic growth drives the electricity demand in India. The government’s focus on attaining ‘Power for all’ has accelerated capacity addition in the country. Increasing per-capita power consumption will provide the energy industry with a boost.
The government commits to increasing the usage of clean energy sources and is now working on a number of large-scale sustainable power projects. Also, it is extensively promoting green energy. Furthermore, renewable energy has the potential to provide a large number of jobs at all levels, particularly in rural areas.
The Indian government plans to create a ‘green city’ in each state that is driven by renewable energy. With solar rooftop systems on all of the city’s houses, solar parks on the outskirts, waste to energy facilities, and electric mobility-enabled public transportation systems.
India’s energy demand is expected to expand faster than that of all major economies. The country’s energy demand may be 1,516 Mtoe by 2035. By 2025, India wants to expand natural gas’s contribution to the country’s energy mix from 6% to 15%.
India’s very low per capita steel consumption, as well as the predicted increases in consumption due to expanded infrastructure construction and the thriving automobile and railroads sectors, provide enormous opportunities for expansion.
The Metals and Mining sector is expected to witness a major reform in the next few years. The new reforms and projects around Make in India Campaign, Rural Electrification and Smart Cities are going to be major drivers. 

Additionally, the focus on building renewable energy projects under the National Electricity Policy and the rise in infrastructure development will also contribute to the sector’s growth.

  • Historical Performance: The historical performance of an energy fund doesn’t guarantee future returns. However, analysing the energy fund’s returns against its benchmark and peers will help you understand its performance. You can analyse the fund’s performance over different market cycles by looking at its historical performance. Always choose energy mutual funds that have consistently outperformed their benchmark and peers.
  • Investment Objective: Energy mutual funds are designed to take advantage of the energy, metal, power, oil and gas sector’s long-term growth potential to build long-term wealth. The fund manager handpicks the energy sector stocks on the basis of the company’s track record, management, growth prospects, and overall industry situation. Furthermore, efforts are taken to maintain the portfolio diversified within the energy sector to ensure minimum risk.
  • Investment Horizon: Energy mutual funds are equity schemes and therefore require a long-term investment duration to generate significant returns. Energy schemes can be highly volatile in the short term. Consider investing in an energy fund only if you have a long-term investment horizon, and understand the sector well.
  • Suitability: Energy mutual funds are ideal for aggressive investors who seek energy sector exposure to their portfolios. These funds help you diversify your investment portfolio. To overcome the volatility, however, a long-term investment horizon is required. As a result, consider whether the energy sector theme and funds are appropriate for your investment portfolio, objectives, and time horizon.
  • Asset Allocation: A well-diversified investment portfolio is always a good idea. With a well-diversified portfolio, the market’s volatility reduces. Following a theme always restricts the investment pool. However, the fund manager has the liberty to explore energy stocks across market capitalisation. Thus, giving the benefit of investing in high-value businesses. As a result, search for energy funds that have a well-balanced asset allocation.

Even though the energy theme has good future prospects, its growth may not be permanent. Markets move in cycles, and so do sectors and companies. Therefore, if you are an investor who understands the energy theme in-depth and is willing to undertake the volatility, you can consider investing in energy mutual funds.

Energy Sector Outlook in India

Power

Power is a fundamental component of a country’s infrastructure, economic growth and welfare. The availability and development of suitable infrastructure are critical for India’s economy to continue to thrive.

India’s power sector is one of the world’s most diverse sectors. The conventional power generation sources include coal, lignite, natural gas, oil, hydro, and nuclear power. On the other hand, the viable non-conventional options include wind, solar, and agricultural & domestic waste.

For generation from all sources (excluding atomic energy), transmission and distribution of electric energy, and Power Trading via the automated route, India allows 100% FDI in the power sector. 49% FDI is allowed in Power Exchanges that are registered under the automatic method.

Renewable Energy

India ranked 3rd in the renewable energy attractive index in 2021. As of 2020, India ranked 4th in renewable and solar power and fifth in wind power. India’s renewable energy sector is the 4th most attractive destination worldwide. Renewable energy will play an essential part as India attempts to fulfil its own energy demand by 2040.

According to the Central Electricity Authority (CEA), renewable energy generation will increase from 18% to 44% by 2029-30, while thermal generation will decrease from 78% to 52%. Under the automatic route, renewable energy production and distribution projects can get up to 100% FDI, according to the rules of The Electricity Act, 2003.

Oil and Gas

The oil and gas sector is India’s eighth core industry. Therefore, it significantly impacts how other important sections of the economy make decisions. India’s economic growth has a close correlation to its energy demand. Hence, the demand for oil and gas is expected to increase, making the industry attractive for investment.

After China and the United States, India is the world’s third-largest in energy and oil consumption. Furthermore, India is the largest exporter of petroleum products in Asia and the second-largest refiner.

By 2023-24, India plans to blend 20%  ethanol in petrol products. Under the Ethanol Blended Petrol (EBP) Program, the government encourages the use of ethanol made from sugarcane and food grains. To meet the rising demand, the government has implemented a number of initiatives. It has authorized 100% FDI in numerous sectors, including natural gas, petroleum products, refineries, etc.

Iron and Steel

India is the world’s second-largest producer of crude steel as of October 2021. Furthermore, India has the world’s fifth-highest reserves of Iron Ore. Domestic availability of raw materials such as iron ore and low-cost labor has fuelled India’s steel industry’s rise. As a result, India’s steel industry has been a major contributor to the country’s manufacturing output.

The Indian steel sector employs modern and cutting-edge technology in its steel mills. It has always aimed to keep older facilities up to date and upgrade them to better energy efficiency levels. Also, the industry is undergoing the consolidation of players. As a result, players from other sectors are investing heavily. Moreover, the ongoing consolidation is a good opportunity for global players to enter the Indian markets. 

Metals and Mining

India is the world’s second-largest coal producer and crude steel producer. In the steel and alumina industries, India has a competitive advantage in terms of production and conversion costs. Its strategic location offers a great potential for exports to develop as well as fast-growing Asian markets.

In 2019-20, India has 1,303 mines that reported mineral output (excluding atomic, fuel, and minor minerals) and produced 95 minerals: 4 fuel-related minerals, 10 metallic minerals, 23 non-metallic minerals, 3 atomic minerals, and 55 minor minerals. In 2040, coal is expected to be India’s greatest single source of electricity.

India has large reserves of Iron ore, Manganese Ore, Bauxite, Baryte, Mineral Salts, Chromium, and Rare Earth Metals.

100% FDI in the steel, mining, and coal & lignite via the automatic route.

Chemicals

India’s chemical sector is diverse, covering more than 80,000 commercial products. The products can be broadly classified into petrochemicals, agrochemicals, bulk chemicals, speciality chemicals, fertilizers, and polymers.

Many sectors, including textiles, paper, paints, soap & detergents, medicines, and agrochemicals, rely on India’s chemical industry for raw materials.

Following the US, Japan and China, India is the world’s fourth-largest producer of agrochemicals. And third-largest consumer of polymers.

By 2025, the market for chemicals and petrochemicals is expected to exceed USD 300 billion. India’s chemical sector has been de-licensed except for a few hazardous substances. The Chemicals and Petrochemicals sector will benefit from state-of-the-art infrastructure provided by upcoming Petroleum, Chemicals and Petrochemicals Investment Regions (PCPIRs) and Plastic parks.

100% FDI is permitted for the chemical sector under the automated route, with an exception for hazardous chemicals.

Source: Make in India, IBEF, Invest India

Growth Drivers

  • Electricity Demand: The country’s electricity demand has risen significantly and is likely to continue to rise in the coming years. A substantial increase in capacity installation is necessary to meet the country’s growing need for power. Furthermore, industrial expansion activity boosts demand for electricity.
  • Government Commitments: India plans to reduce its carbon emission by 1 billion tonnes by 2030 and achieve net-zero carbon emission by 2070. Furthermore, its plans to increase the country’s renewable energy capacity to 500 GW by 2030.
  • Solar Cities and Parks: A plan to create 1 solar city per state and a total of 45 solar parks across the nation.
  • New Opportunities: With a wide range of opportunities in renewable energy, the sector looks attractive. Wind – Solar Hybrid, Off-shore Wind Energy, Floating PV Projects, Green Hydrogen are some of the projects.
  • Expansions: The government plans to double the gas pipeline network in the next five years (pipeline network as of 2021: 19,000 kilometers). The Indian government is heavily expanding the coverage of the City Gas Distribution (CGD) network across the country in order to make natural gas more accessible to the general public. CGD networks ensure the provision of cleaner fuel (i.e., PNG) to homes, businesses, and transportation fuel (i.e., CNG) to vehicles.
  • Cost Advantage and Rising Demand: The low-cost steel and alumina production offers a great advantage to India. Furthermore, housing for all by 2022 and the expansion of the railway network initiatives pose great opportunities.
  • Unexplored Mines: So far, India has only explored 20% of its total reserves of minerals. Thus, great potential lies ahead of it.